The German Innovation System Is Suffering from Long COVID

In early 2020, the COVID-19 pandemic hit the German economy unexpectedly and led to a deep recession. Previous crises have shown that most firms tend to spend less money on innovation in times of recession. This was also the case during the COVID-19 pandemic: firms that were severely affected by the pandemic reduced their innovation spending considerably, not only in the short but also in the long run . This is shown by a ZEW study based on data from the Mannheim Innovation Panel (MIP) for the years 2019 to 2022.

In their study, ZEW researchers have examined the short- and long-term effects of the COVID-19 pandemic on the innovation expenditures of more than 2,400 German firms included in the MIP. The researchers use the fact that not all firms were equally affected by the pandemic to identify its impact on innovation expenditure. For firms that were severely affected by the pandemic, innovation activity was reduced by an average of 18 percent more than for firms that were not or only slightly affected by the pandemic. Among the hard-hit firms, those that were already more digitalised before the pandemic proved to be more resilient during the COVID-19 crisis.

“The hard-hit firms also plan to cut their investments in innovation in the future. It could be said that these firms are suffering from their own kind of Long COVID in terms of innovation intensity,” says Professor Bettina Peters, deputy head of the ZEW Research Unit “Economics of Innovation and Industrial Dynamics”. The long-term consequences of the pandemic are making a swift economic recovery after the crisis more difficult.